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Dylan Matthews over at Wonkblog has an interesting piece on long term unemployment in the US:

Indeed, the percentage of the labor force that had been unemployed for five weeks or less didn't grow all that much during the economic meltdown.

What changed was what happened after or within those five weeks. In 2007, they typically ended with a job. In 2009 and 2010, they more often ended with another few weeks of unemployment.

Yes, that's entirely true: because that's what happens in recessions. In the economy in general there's a job destruction rate and a job creation rate. Unemployment is what we see when the two of these are out of balance. And a recession doesn't particularly change the job destruction rate: but it does lower the job creation rate. So, in a normal economy we see that short-term unemployment (also known as frictional unemployment, the time it takes to leave one job and get hired at another) rate but very little of that long-term one. And what happens in a recession, when that job creation rate falls, is that the period of unemployment lengthens.

OK, this is all fairly well known.

The percentage of the labor force unemployed for 27 weeks or more is finally decreasing, after peaking at about 4.3 percent in April 2010 and hanging around 4 percent until September 2011. But it's unclear how much of that decline is due to those workers finding jobs versus dropping out of the workforce.

This is also true but we do indeed have a problem here. For those dropping out of the workforce are extremely unlikely to ever enter it again. This is a tragedy for them of course: they get stuck outside the pleasures and incomes of working life. It's also not all that good for the rest of us: we lose those goods and services that they could be producing.

There are ways to remedy this, and get that top category shrinking faster, and AEI's Michael Strain and Kevin Hassett and CEPR's Dean Baker have some interesting ideas. Direct job creation along the lines of the TANF Emergency Fund — perhaps the most effective part of the stimulus package — would probably help a lot, as would looser monetary policy through NGDP targeting or helicopter drops or negative interest rates.

Direct job creation, yes, that might help, but those other measures aren't going to. You see, they're macroeconomic actions and what we've got here is a microeconomic problem, not a macro one. We must therefore have microeconomic solutions to our problem.

But even if policymakers adopted those measures, some of the damage may be too hard to repair. Long-term unemployment leads to an erosion of skills, dissociation from the labor market and other forms of "scarring" that last for many, many years. Brad DeLong and Larry Summers argue convincingly that this and other forms of what economists call "hysteresis" (basically, the long-term damage produced by short-run recessions) could have permanently increased the unemployment rate even at times when the economy is operating at full steam, and could have reduced how fast the economy can even go when it's at full steam.

Yep, quite. And that's why it's going to be very useful indeed to have a look at the European experience. Because it is exactly this that has made the difference between the US and European unemployment rates over the decades. As Richard Layard (the Grand Poobah of the study of this particular problem) puts it:

The evidence for the first proposition is everywhere around us. For example, Europe has a notorious unemployment problem. But if you break down unemployment into shortterm (under a year) and long-term, you find that short-term unemployment is almost the same in Europe as in the U.S. – around 4% of the workforce. But in Europe there are another 4% who have been out of work for over a year, compared with almost none in the United States. The most obvious explanation for this is that in the U.S. unemployment benefits run out after 6 months, while in most of Europe they continue for many years or indefinitely.

Note that this doesn't mean that unemployment insurance should not have been increased recently. Only that as we return to normality it should be cut again. Please note also that those who say that extending UI had no effect on unemployment are wrong: as are those who say that it's the only cause of the increase in long-term unemployment. There was undoubtedly some increase in long-term unemployment as a result of the UI extension: people do respond to incentives after all. The question is rather whether that increase was worth it for the alleviation of some of the problems of those who absolutely couldn't find work. My personal opinion is yes but the important point to note is that we've already been through all of these questions before, over on my side of the pond, and we know the answers. We don't need to have the debate all over again, we just need to get on with applying the solutions.

This long-term unemployment is a huge economic waste. For people who have been out of work for a long time become very unattractive to employers and easily get excluded from the world of work. So it often happens that employers feel a shortage of labour even when there are many people long-term unemployed, with the result that inflation rises even in the presence of mass unemployment.

And this is the point that we must be aware of. Stimulating the economy, running a greater fiscal deficit, just won't reach those long-term unemployed nor those so dispirited they've left the labour force altogether. To get to enough growth to encourage them back into the workforce would require that growth be so high that we'd have the Fed raising interest rates to cool that roaring economy. Before, sadly, those long-term unemployed get back into work. We've thus a problem, in that we can imagine the next recession (and oh yes, there will be one) increasing that long-term unemployment problem again and so it ratchets up over the decades until the US has the same sort of unemployment problem as Europe. A large chunk of long-term unemployment that no amount of economic growth is going to shift.

Given that no European country has actually quite solved this problem there is no quick and easy answer. But we are at least helped by knowing where to go looking for an answer: it's going to be in microeconomics, in the detailed structures of the unemployment and job training system, not in the macroeconomics of the growth rate of the whole economy.